Icahn Enterprises LP (IEP) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Icahn Enterprises L.P. second-quarter 2016 earnings call with Andrew Langham, General Counsel; Keith Cozza, President and CEO; and SungHwan Cho, Chief Financial Officer.

I would now like to hand the call over to Andrew Langham, who will read the opening statement.

Thank you. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements we make in this presentation, including statements regarding our future performance and plans for our businesses and potential acquisitions. These forward-looking statements involve risks and uncertainties that are discussed in our filings with the Securities and Exchange Commission, including economic, competitive, legal, and other factors. Accordingly, there is no assurance that our expectations will be realized. We assume no obligation to update or revise any forward-looking statement, should circumstances change, except as otherwise required by law. This presentation also includes certain non-GAAP financial measures.

Good morning. Welcome to the second-quarter 2016 Icahn Enterprises earnings conference call. Joining me on today's call is SungHwan Cho, our Chief Financial Officer. I would like to begin by providing some brief highlights. Sung will then provide an in-depth review of our financial results and the performance of our business segments. We will then be available to address your questions.

For Q2 2016, the net loss attributable to Icahn Enterprises was $69 million or $0.50 per LP unit, compared to net income of $212 million or $1.68 per LP unit in the prior-year period. Adjusted EBITDA attributable to Icahn Enterprises for Q2 2016 was $307 million compared to $622 million in Q2 of 2015. Our investment fund had a negative return of 6% in Q2 of 2016, with returns being hampered by the performance of our short positions.

Q2 2016 revenues for our automotive segment were $2.6 billion, an increase of 28% over Q2 of 2015. The higher revenues were due to Q1 2016 acquisition of Pep Boys, and the June 2015 acquisition of the IEH Auto businesses. We continue to focus our efforts on integrating these businesses, and are pleased with the progress made to date.

In our energy segment, our Q2 2016 revenues were $1.3 billion, and consolidated adjusted EBITDA was $113 million. Operating results for Q2 2016 include the April acquisition of the East Dubuque fertilizer facility. CBR refining posted solid operational performance during the quarter, with combined crude throughput of 203,000 barrels per day. However, its results continue to be hampered by the increasing cost of RINs, which are needed to comply with the renewable fuel standards. We remain optimistic that the EPA will recognize that the current program is broken, and work to change the point of obligation to the parties that can control the blending of renewable fuels.

In our railcar segment, investments in our railcar service and railcar leasing businesses continue to complement our manufacturing operations, with both business lines helping to offset lower volume of new railcar shipments. The segment's lease fleet was over 45,000 railcars at the end of Q2 2016, with lease rates improving slightly from the prior-year period.

In our gaming segment, Tropicana had a strong operational quarter, particularly at its Trop Evansville property. Our gaming segment's consolidated adjusted EBITDA for Q2 2016 was $33 million.

Q2 2016 results were disappointing, but we remain confident in the existing composition of our investment portfolio, and our ability to create long-term value.

With that, let me turn it over to Sung.

Thanks, Keith. I will begin by briefly reviewing our consolidated results and then highlight the performance of our operating segments and comment on the strength of the balance sheet. In Q2 2016, the net loss attributable to Icahn Enterprises was $69 million compared to a net income of $212 million in the prior-year period. As you can see on slide 5, in Q2 2016 the net loss was primarily driven by the performance of the investment funds. Our investment funds were negatively impacted by the performance of our short exposure.

I will now provide more detail regarding the performance of the individual segments. Our investment segment had a loss attributable to Icahn Enterprises of $107 million for Q2 2016. The investment funds had a return of negative 6% in Q2 2016 compared to a return of positive 3.9% for Q2 2015. Long positions were flat for the current quarter, while short positions in other expenses had a negative performance attribution of 6%.

Since inception in November 2004 through the end of Q2 2016, the investment funds' gross return is 122%, or 7% annualized. The investment funds continue to be significantly hedged. At the end of Q2 2016, net short exposure was 149% compared to a net short exposure of 25% at the end of 2015. IEP's investment in the funds was $1.7 billion as of June 30, 2016.

Now to the energy segment. For Q2 2016, our energy segment reported revenues of $1.3 billion, and consolidated adjusted EBITDA of $113 million compared to revenues of $1.6 billion and consolidated adjusted EBITDA of $230 million for the prior-year period. Operating results for Q2 2016 include the April acquisition of the East Dubuque fertilizer facility.

CVR Refining reported Q2 2016 adjusted EBITDA of $85 million, compared to $194 million in the prior year. CVR Refining posted solid operational performance during the quarter, with combined crude throughput of 203,000 barrels per day despite lower crude rates at the Coffeyville refinery due to the restriction on the Magellan pipeline system.

While refining margins improved quarter over quarter sequentially, product realizations are still hampered by the large overhang of product inventories in the US. Additionally, the increasing cost of rent significantly impacted Q2 results. Refining margin adjusted for FIFO impact per crude oil throughput barrel, a non-GAAP financial measure, was $9.56 in Q2 2016 compared to $17.22 in the prior-year period.

CVR Partners reported Q2 2016 adjusted EBITDA of $29 million compared to $36 million in Q2 2015. Adjusted EBITDA was negatively impacted by $13 million of purchase price accounting adjustments related to CVR Partners' acquisition of the East Dubuque fertilizer facility. For Q2 2016, average realized gate prices for UAN and ammonia were $199 per ton and $417 per ton, respectively; compared to $269 per ton and $546 per ton, respectively, for the same period in 2015.

Now turning to automotive. Our automotive segment's Q2 2016 net sales were $2.6 billion, up 28% from the prior-year period due to the acquisition of Pep Boys and the acquisition of the IEH Auto businesses. Consolidated adjusted EBITDA for our automotive segment was $229 million in Q2 2016, compared to $184 million in Q2 2015.

Federal-Mogul, on a stand-alone basis, reported Q2 net sales of $1.9 billion, down 2% over the comparable prior-year period. Higher OE sales, and sales from the acquired valvetrain business, were offset by lower aftermarket sales and $15 million of negative impact from currency exchange rate fluctuations.

Adjusted EBITDA in Q2 2016 was $196 million, up $14 million or 8% compared to Q2 2015. The increase was due to improved gross profit margins, driven primarily by operational improvements in both divisions, as well as the favorable impact of ongoing restructuring and integration programs, partially offset by the impact from lower sales.

IEH Auto and Pep Boys, on a stand-alone basis, had Q2 2016 revenue of approximately $685 million, and adjusted EBITDA of $27 million.

Now turning to our railcar segment. Our railcar segment had railcar shipments for Q2 2016 of 1,017 railcars, including 85 railcars to leasing customers; as compared to 2,397 railcars for the prior-year period, of which 1,756 railcars were to leasing customers. As of June 30, 2016, ARI had a backlog of 5,600 railcars, including 1,556 railcars for leased customers.

According to the Railway Supply Institute, the railcar manufacturing backlog has decreased from a record level of nearly 143,000 railcars at the end of 2014 down to approximately 89,000 railcars at the end of Q2 2016. 78% of the current industry backlog is comprised of tank cars and the covered hopper railcars, the two primary railcar types manufactured and leased by our railcar segment.

The leasing businesses within the railcar segment continue to perform well. In Q2 2016, we grew the combined lease car portfolio to roughly 45,000 cars from approximately 43,500 cars at the end of Q2 2015. Average lease rates in Q2 2016 improved slightly from the prior-year period. Adjusted EBITDA attributable to IEP for the railcar segment was $102 million in Q2 2016 compared to $83 million in the prior-year period. The increase was primarily driven by increased ownership of the leasing businesses.

Now turning to the gaming segment. Total gaming segment operating revenues were $254 million in Q2 2016 compared to $203 million in Q2 2015. The increase was primarily due to an increase in consolidated gaining volumes of 28%, primarily due to the inclusion of the results from Trump Entertainment Resorts upon its emergence from bankruptcy at the end of February 2016, coupled with higher gaming volumes and table hold percentage at Trop Evansville.

Our gaming segment's slot hold percentage was 9.5% for Q2 2016 compared to 9.7% for Q2 2015. The gaming segment's table game hold percentage was 17.7% for Q2 2016 compared to 16.6% for Q2 2015. Our gaming segment's consolidated adjusted EBITDA for Q2 2016 was $33 million, which was consistent with the prior-year period.

Now turning to food packaging. Net sales for Q2 2016 decreased by $6 million or 7% compared to the prior year. The decrease was primarily due to lower sales volume, and unfavorable price and product mix. Pricing globally has been weak due to competitors with weaker functional currencies, and some excess capacity. Consolidated adjusted EBITDA of $15 million in Q2 2016 was down $3 million from the prior year. Gross margin as a percentage of net sales was 26% in Q2 2016, which was consistent with the prior year.

Now turning to metals. Net sales for Q2 2016 decreased by $27 million or 26% compared to the prior year. Net sales decrease was driven by lower selling prices and lower shipping volumes across all product lines, with the exception of secondary plate volumes. Adjusted EBITDA was a loss of $1 million in Q2 2016 compared to a loss of $3 million in the prior year. Gross margin as a percentage of net sales was 1% for Q2 2016 compared to a loss of 7% for the prior year. Prices are still at low levels, and volumes continue to be challenging in this market environment.

Now to the real estate segment. Real estate revenues were $24 million in Q2 2016, which was slightly above the comparable prior-year period. Revenues from our development operations improved quarter over quarter, with sales of residential units increasing by $5 million. Operating revenues from our real estate segment were substantially derived from our resort and rental operations both Q2 2016 and Q2 2015. Our net leased portfolio continues to drive earnings in this segment, with its 15 properties generating strong cash flows. The real estate segment generated $11 million of adjusted EBITDA in Q2 2016.

Now to our mining segment. International iron ore prices have improved since the year-end to average $56 per ton during Q2 2016. Q2 2016 EBITDA was $3 million on $21 million of sales. Results for 2015 shown here include less than one month of operations since our majority acquisition of Ferrous on June 8 of 2015. We continue to monitor the outlook for iron ore demand and future prices.

Now turning to home fashion. Q2 2016 net sales increased by $1 million compared to the prior-year period, due to higher sales volume. We are continuing to concentrate on higher-margin lines, and believe we will have solid placements for the rest of 2016. Adjusted EBITDA was $1 million in Q2 2016, which was consistent with the prior year. Gross margin as a percentage of net sales was 13% for Q2 2016 as compared to 14% in Q2 2015.

Now to our liquidity. We maintain ample liquidity at the holding Company and at each of our operating subsidiaries to take advantage of attractive opportunities. We ended Q2 2016 with cash, cash equivalents, liquid assets, our investment in the investment funds, and revolver availability totaling $4.5 billion. Our subsidiaries have approximately $1.7 billion of cash and $800 million of undrawn credit facilities to enable them to take advantage of attractive opportunities.

In summary, we continue to focus on building asset value and maintaining ample liquidity to enable us to capitalize on opportunities within and outside of our existing operating segments. Thank you.

Operator, can you please open the call up to questions, please?

(Operator Instructions). Dan Fannon, Jefferies.

I guess could you give some context around the positioning of the fund? The net short position seems to be maintained. You've, I think, historically had a view around high-yield, and I think that's been expressed through -- I think it was a CDX. But just a little bit of color around that, and kind of the outlook for what you're seeing would be helpful.

Sure. It's Keith, Dan. I think the composition is -- hasn't dramatically changed. We still have our bearish views on high-yield spreads; and frankly, they are even stronger now, with spreads compressing so much. The market seems to be pushing spreads tighter and tighter. And so expressing it in the form of CDX is still part of our hedging strategy. And the rest of it is -- there is a combination of some single names, but the majority of our hedging is done through broad market hedges such as S&P 500, things of that nature.

Okay, and is -- I think last quarter we saw the -- your investment in the fund go down because of the Pep Boys transaction. And I guess is that -- how should we think about timing around and amount of that cash potentially coming back into the fund as that business levers up, or you take cash out of it?

I think we continue to work on putting a more permanent capital structure. And at the Pep Boys level, I think it will happen in phases. Just from a timing point of view, we are really focused on harvesting the significant amount of synergies that we've identified at Pep Boys. And it will take 12 to 18 months to really start coming through in the numbers in a meaningful way. So we think it makes more sense to focus on that aspect of it before hitting the market with a significant permanent capital structure.

In the interim, we are going to -- we are working on some relatively straightforward stuff, such as an ABL -- a combined ABL at Pep Boys and Auto Plus. And that will allow us to take some funds back up to the holding Company. But to the sizing that you're talking about, it's probably, I would say, a next-year event.

Got it. And then can you talk about the latest news involving the Taj Mahal and the Trump investment? Last week -- so it has come out that it was going to close. I guess update us on where that is marked for you guys, and what that means for that investment for you.

I am going to ask Sung if he can -- I don't know if we have it right this second, of where it's marked. It's not a mark-to-market position. It's a consolidated business, so we will see if we can pull up here the book value of it. But as far as the --. Yes, so it's about a couple hundred million dollars on the books. It's $208 million, to be exact.

As far as the announced closing of it, we had -- we took this thing out of bankruptcy. Icahn Enterprises, with the support of Carl Icahn, saved this thing and supported it with over -- approximately $100 million over the last two years to keep this thing alive, and have a plan to turn it around. Part of our plan was entering into the operating agreement with Tropicana, because that management team has done a great job at Trop, and we thought that they could help turn things around at the Taj.

And then this Local 54 union went on strike, and it's destroying the business. And the strike is going on to four or five weeks now, actually six weeks now. And effectively, business is down from the strike. We offered the union a healthcare plan and certain work rule changes to try to resolve this thing, and they don't seem to understand that we are losing a fortune. And we are really left with no choice now. We are running a public company here. And with no end in sight, we had to choose to close it rather than to continue to try to save it.

So with that being said, it will close. We don't have the exact dates. And we will work through trying to come up with a long-term plan to preserve value in it. But for now, that's all I can say on it.

Okay. And then I guess just one more on the energy segment. With one of the subsidiaries not declaring a dividend, up to the parent in CVR Refining, I guess how long should we think about the dividend stream from CVR Energy being sustainable at, whatever, the $0.50 it did this quarter?

I can't -- so obviously CVI has a Board, and that Board has that very debate each quarter. So I can't commit to how long they will decide to keep that dividend in place. But I will say that CVI, to kind of reconcile the two companies -- even though there's no distribution from CVRR this past quarter -- CVI is running with significant excess cash flow above -- cash balances above their commitments and needs. And so they, as a mathematical matter, can sustain that dividend for a number of quarters into the future. But again, the Board will evaluate what they want to do with that excess cash on a quarterly basis.

Got it, thank you.

Brent Thill, UBS.

Just a quick question here. We already talked on the Taj Mahal closing; so a couple other ones just on NAV, specifically related to Tropicana at this stage. I was wondering if you can give us any insight. I know you used your own comps rather than the market price for those. But just wondering if you can give us any color on what kind of companies -- are they private or public comps, or anything else you can give us on that? I'm curious.

The multiples we use are based on public companies within the same segment, within the same industries that we think are comparable. So for Tropicana, we used publicly traded US gaming companies of similar size and profile. And for Viskase, we used -- there aren't really any domestic comps, but there's a few global comps out there that we compare against within that, and they are both in the casing industry.

Okay. And just I'm asking just because mainly it's a pretty big disconnect on the public price. And I get the trading volume is pretty low, but it just seems like there is a pretty big gap.

Yes, I would just comment that I think you are using the term trading pretty liberally. We are not seeing a lot of trading. It goes days without trading at all.

No, I acknowledge that, yes.

So we think this is a fair way to look at it. But our methodology, we put out there and disclose it, and you're free to use whatever multiples you think are accurate.

Okay. That's all I've got, guys, thanks.

[Abby Freeman, Hunter Creek].

Following up with the last question, given that TPCA trades at a material discount to where you believe it's worth, why haven't you taken any steps to correct trading prices at TPCA, and why aren't you guys buying back more shares?

Are you talking about Tropicana?

Correct.

I mean (multiple speakers).

I imagine there's some easy steps: listed on the exchange, maybe posted on public calls, talk to equity research, sort of improve the liquidity. Or, why aren't you guys buying back more shares, given you traded at plus 50% (multiple speakers) where we have it marked and where it's worth?

I would say a couple of things. A, we don't manage our underlying portfolio of companies based on where their stock price is on a quarter-to-quarter basis. Our focus on Tropicana is working with the management team for the right growth plans, acquisitions, dispositions, capital spending plans, and growing the business and making it more profitable. Over the long-term, we believe that the stock price will take care of itself.

That being said, Tropicana has a buyback plan out there. They periodically bought stock back. And when they are able to do that, and when there is willing sellers, they will continue to do that. But as far as the stars aligning for all that to happen, you have to have willing sellers and willing buyers.

So there is -- but I don't think we -- I don't want to mislead you. We don't -- we are not concerned; or, frankly, I'm not doing anything to bridge the gap between where the market says some stock trades versus how we run our business.

Right. I imagine there's some easy things you guys could do to improve the value, like your Chairman has done with other companies.

Okay.

Are there going to be any costs associated with closure of the Taj that the Tropicana will incur?

No, there will be no costs. The only thing Tropicana does on behalf of the Taj is manage the business. They have a management agreement in place that entitles them to a set management fee, and then a percentage of EBITDA which will be nothing now. So -- but the manage -- they don't incur any costs associated with the management of the Taj.

And then I imagine once the Taj closes, you'll see a nice revenue bump at that -- at the Tropicana in Atlantic City?

I can't predict where the Taj revenue will be re-dispersed amongst the seven remaining casinos. I would think Trop should be able to get some of it.

Great, well, thank you very much.

(Operator Instructions) [Andrew Ketchies], Barclays.

Just two quick ones on the balance sheet side of things. You obviously have a 2017 maturity coming up on the horizon. Any general thoughts on addressing those? And any chance of upsizing that tranche, and a potential refinancing to replenish cash at the holdco level?

And then a second part, just more broadly, how do you guys think about the level of debt on your balance sheet? I think traditional leverage metrics probably aren't as applicable here. So, any metrics you guys tend to look at when gauging the amount of balance sheet capacity you have would be helpful. Thanks.

The first part of your question, I would respond and say that we will look to -- our initial reaction will be to refinance the March 2017 debt, depending on where the market is. Currently, it wouldn't be a possibility to upsize it. We disclosed we have an additional debt incurrence test. And we don't have any room under additional debt -- under that incurrence test at Icahn Enterprises. But we have the ability, obviously, to refinance. And market depending, we will evaluate the situation and see where pricing is. And we are optimistic that we will refinance that and roll into either a later-dated existing tranche, or open up a new tranche altogether.

As far as the way -- yes, I agree that traditional debt metrics maybe aren't as applicable here. We've said this in the past; we tend to look at cash as our raw material. And if we can get access to cash at a low cost of capital, we think we can deploy that and make outsized returns. So we monitor our total cash levels. The indentures, frankly, are going to govern that, at this juncture. And the indenture for now, we are going to sit at this $5.5 billion level.

Okay, thanks. Very helpful.

Thank you, and currently I have no more questions in queue at this time.

Okay. Thanks, everybody. We'll look forward to speaking with you after the third-quarter results. Take care.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.